There’s an argument to made that retail investors are a pretty contrary indicator, that when they start piling into stocks it’s a sign the market’s made most of its gains. There’s evidence to back up that view:

The grand total for the average investor in all funds in the aughts was a 1.68% annualized return, compared with 3.18% for the average fund…In U.S. equities, the average investor earned a scant 0.22% annualized, compared with 1.59% for the average fund. As I noted above, two bear markets and two snap-back rallies made for a really challenging time for many fund investors.

That was research from Morningstar conducted a couple of years ago, but I doubt things have changed since.

It’s fair to say that retail investors are more swayed by emotions than they should be, and today’s flow data can be seen as further evidence — these inflows are coming after the Standard & Poor’s 500 index (SPY) has gained 117% since its March 9, 2009 low, and as the Russell 2000 index (IWN) is hitting record highs almost every day.

At the headline level things are looking good, or at least better, now than they have for a long time, and thus the average investor finally feels safe enough to head back into stocks. These inflows could help to further boost stocks and even push the S&P 500 past its record high — but they can also be read as a red flag for the months ahead.

About Stocks To Watch

Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.